The Economic Loss Rule

THE ECONOMIC LOSS RULE                      

 E. Dwight Taylor, The Rocky Mountain Law Group, LLC.

 Borrowers who have complaints against banks often attempt to expand their contract disputes to include claims based upon torts such as fraud, breach of fiduciary duty, intentional interference with contract, negligent misrepresentation and a host of other horrible-sounding claims.

 In order to prevent the escalation of a contract dispute into claims that would bear the potential for exemplary damages and attorney fees, thereby changing the relationship between the parties after a dispute has arisen, the Colorado Supreme Court has fashioned the “Economic Loss Rule”.  The Economic Loss Rule draws a bright line between tort law and contract law.  The Court has held that when parties have had the opportunity to allocate risks between themselves through a bargaining process, they must be held to their negotiated contractual remedies when conflicts arise.  Of course most credit agreements do not spell out all of the remedies, but the Uniform Commercial Code will provide those remedies to the extent they are not provided for in the credit agreement.  The Court has said that a party suffering only economic loss from the breach of an express or implied* contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.  The Colorado courts have held that an action to recover damages for the loss of a bargain is the exclusive province of contract law.  The Economic Loss Rule prohibits a negligence claim when the breach of duty is contractual and the harm incurred is the result of failure of the purpose of contract.  If the duty of care owed was memorialized in a contract and there is no duty independent of the contract, the Economic Loss Rule bars the tort claim and holds the parties to the contract’s terms.  (*Credit agreements cannot be implied.)

 Thus, the Economic Loss Rule will bar a tort claim where: 1) the source of duty is contractual; 2) the damages are purely economic; and 3) and no independent duty of care exists.

 Of course, that leaves the complaining party the opportunity to assert that there is an independent duty owed by the bank to the borrower arising from the general law.  That is where the bank is also protected by the Credit Statute of Frauds, discussed in an earlier article.  In almost every conceivable case a bank will not have a relationship with any other entity with respect to a loan that is not based upon a “credit agreement”.  In such instances, the Colorado courts have held that the plain language of the Credit Statute of Frauds applies to bar any action or claim “relating to” a credit agreement and expressly precludes exceptions by implication or construction.  Any tort claim relating to an oral credit agreement involving a principal amount in exceeding $25,000 is barred**.  The Colorado courts have also held that the Credit Statute of Frauds is not limited to actions attempting to enforce an agreement’s terms.  Rather, the statute bars suit where there is no written credit agreement any time an action relates to a purported oral agreement.  (**Keep this limitation in mind…small loans can bear risks that larger ones do not.  This limitation may, however, help some bank customers with their trade credit.)

 This dual effect of law made both by the Colorado legislature and the Colorado courts makes it difficult for a borrower to assert a claim that is not based upon the “four corners” of the credit agreement.  These laws make tort claims difficult but not impossible because borrower’s counsel can be imaginative.  However, the parade of horribles can be avoided by well-considered and well-written credit agreements and by sound banking practices.  Good bank counsel can help, too.

 Dwight Taylor can be reached at The Rocky Mountain Law Group, LLC, 10800 E. Bethany Dr., Ste. 550, Aurora, CO 80014, phone: 303.597.0202, fax: 303.597.0235, email: dtaylor@rmlawgrp.com      ■

 

Credit Statute of Frauds

 

 

CREDIT STATUTE OF FRAUDS

 

E. Dwight Taylor, The Rocky Mountain Law Group, LLC.

 Colorado law has long required certain types of contracts to be in writing to be enforceable.  The well known ones are contracts for interests in land, contracts that cannot be performed within one year, and contracts to answer for the obligations of another.  There are, of course, other requirements for written agreements scattered about the statutes, but this brief is concerned with the law that relates to credit agreements and is of interest to lenders and borrowers.

 C.R.S. § 38-10-124 provides that no debtor or creditor may file or maintain an action or a claim relating to a credit agreement involving a principal amount in excess of twenty-five thousand dollars unless the credit agreement is in writing and is signed by the party against whom enforcement is sought.  This law is generally referred to as the Credit Statute of Frauds.

A credit agreement is any contract, promise, undertaking, offer or commitment to lend, borrow, repay or forbear repayment of money, to otherwise extend or receive credit, or to make any other financial accommodation.  That includes any amendment, cancellation, waiver or substitution of a credit agreement, and any representation, warranty or omission made in connection with a credit agreement.  A creditor is a financial institution which offers to extend, is asked to extend, or extends credit under a credit agreement with a debtor, and a financial institution is a bank, saving and loan, savings bank, industrial bank, credit union or mortgage or finance company.  A debtor is a person or entity that obtains credit or seeks a credit agreement with a creditor or who owes money to a creditor.  Credit agreements may not be implied under any circumstance, including from the relationship of the parties or from performance or partial performance by the parties, or by promissory estoppel.

 The Colorado Legislature intended that the Credit Statute of Frauds put an end to litigation between banks and their borrowers based upon claims of oral agreements, and to require that the parties to credit agreements reduce their agreements to writing as a condition to enforcement.   The Colorado Courts have been diligent in enforcing the Credit Statute of Frauds.  The Courts have not allowed claims based upon reliance upon oral agreements, or tort claims based upon oral credit agreements, or claims or defenses based upon unjust enrichment or fraudulent inducement seeking rescission. 

 If a court finds that a claimed oral agreement, representation or other statement relates to a credit agreement, it is likely that the challenge to a written credit agreement will not succeed.  A court will allow oral testimony to explain the intended meaning of an ambiguous credit agreement, and will allow email messages to satisfy the requirement for the credit agreement, or any amendment to a credit agreement, to be in writing.  Courts also will not necessarily find that any transaction with a bank is a credit agreement; the transaction must entail the extension of credit or the grant of some form of financial accommodation to have the benefit of the Credit Statute of Frauds.  A transaction must also be between a financial institution and a debtor for the Credit Statute of Frauds to apply.  It would not apply to an individual making a loan or to an organization that does not engage in the business of extending credit to debtors in its regular course of business.

 So, if you are going to ignore your granny’s admonition to “neither a borrower nor a lender be”, don’t forget to follow the law’s requirement to “put it in writing”.

Dwight Taylor can be reached at The Rocky Mountain Law Group, LLC, 10800 E. Bethany Dr., Ste. 550, Aurora, CO 80014, phone: 303.597.0202, fax: 303.597.0235, email: dtaylor@rmlawgrp.com